After looking at Netflix’s (NASDAQ: NFLX) latest set of financial numbers I have just one question: how can this company survive as a standalone organization?

Two numbers in particular stand out from the streaming-video service’s second quarter earnings report. These figures demonstrates that Netflix is losing a lot of money and that its’ business might not be sustainable. They are:

  • Cash from operations. That number fell to -$1.90 billion (-€1.61 billion) or -$1.97 billion (-€1.67 billion) on June 30, 2017. That means Netflix lost nearly $2 billion (€1.7 billion) from its operations. It also means that Netflix’s losses on cash from operation nearly equal the amount it had in the bank; $2.165 billion (€1.84 billion) in cash and short-term investments on June 30, 2017.

  • Disturbingly these losses are increasing; in March 2017, Netflix reported losing $1.59 billion (€1.35 billion) in cash from operations, in June 2016 it lost -$895.60 million (€759.47 million) What’s really telling is that Netflix has not reported a positive cash from operations from operations number since December 2015. This company has not made money from its operations for two and one half years.

  • Cash from financing. Netflix reported generating $2.504 billion (€2.12 billion) in cash from financing on June 30, 2017. That figure was more than double the $1.101 billion (€930 million) reported in March 2017 and 2.5 times the $87.81 million (€74.46 million) in cash from financing in June 2016.

These numbers are telling because Netflix is not a bank, it does not generate revenue by lending money. There can only be one place that cash from financing is coming from; Netflix is borrowing money to finance its’ operations.

Is Netflix Borrowing its Way into the Death Spiral?

The cash from financing raises some serious questions about some of the other numbers in Netflix’s second quarter earnings report which don’t add up. First there’s the income of $362.09 million (€307.05 million); if Netflix lost $1.9 billion (€1.61 billion) from its operations – where did that come from?

The cynic in me will say from borrowing, which means it is not income. Funds that you borrow have to be paid back or written off at some point. That goes doubly so for the kind of money Netflix is probably borrowing; namely corporate paper or private equity.

Inquiring minds will want to know how is Netflix supposed to pay that back? This is a company that reported a negative “free cash flow” of -$599.76 million (-€508.59 million) on June 30, 2017. That’s right a negative cash flow of nearly $600 million (-€508.80 million) and that negative cash flow is growing. It was -$396.38 million on March 30, 2017 and -$237.11 million (-€201.07 million) in June 2016. Netflix’s negative free cash flow more than doubled over the year.

The negative free cash flow is not all that’s growing; Netflix’s liabilities grew from $9.178 billion (€7.78 billion) in June 2016 to $10.91 billion (€9.25 billion) in December 2016 to $13.40 billion (€11.36 billion) in June 2017. If that growth continues Netflix’s liabilities will exceed its assets; which were $16.52 billion (€14.01 billion) on June 2017, at some point later this year.

That looks suspiciously like the death spiral; in which a company’s debt load exceeds its ability to pay. Okay now Netflix bulls will say that the company’s revenue growth will generate enough cash to pay the debts, unfortunately I do not see it.

Why Netflix Bulls are deluding themselves

The earnings report shows that Netflix bulls are deluding themselves; this company cannot survive as a standalone organization. Revenues are growing but they are being outstripped by the losses.

During second quarter 2017; Netflix added $680 million (€576.64 million) in revenue, it reported $9.51 billion (€8.06 billion) in revenues in March and $10.19 billion (€8.64 billion) in June. During the same period cash from operations fell from -$1.59 billion (-€1.35 billion) to -$1.90 billion (-€1.61 billion). Those losses increased by $310 million (€262.88 million) over the course of one quarter, ycharts data indicates.

If this keeps up Netflix’s negative cash from operations will exceed $2 billion (€1.7 billion) this quarter. Actually I suspect it already exceeds that number now. What’s even scarier; is that Netflix might report a negative-cash from operations of -$3 billion (-€2.54 billion), or more sometime, next year if that keeps up.

Will Netflix have to Change its’ Business Model to Survive?

This means Netflix is going to have some very ugly choices at some point in the next year so. Its’ management team will have to make one of four very unappealing decisions:

  1. Sell the company to a deep-pocketed savior such as Disney (NYSE: DIS), Verizon (NYSE: VZ) or Liberty Media’s John Malone. These vultures will probably stay away with Netflix’s moronic stock price of $181.30 (€153.74) a share and market cap of $78.28 billion on August 7, 2017. Note: if the stock price collapses expect to see a scramble to buy Netflix.

  2. Try to raise more float by charging Netflix’s 100 million subscribers more. For example double or triple or quadruple the prices of each plan. A standard Netflix plan now costs $11.99 (€10.17) a month which is a bargain. The danger from this is obvious; will people be willing to $22 (€18.66) or $36 (€30.53) or $62 (€52.58) month from Netflix? The sorry truth is that nobody knows. Although Hulu is currently charging $39.99 (€33.91) a month for its live service.

  3. Change Netflix’s business model. Offer a more expensive premium plan say $40 (€33.92) or $50 (€42.50) a month. Or start selling individual programs or movies. An example of this might be a $1 (€0.85) charge per movie for nonsubscribers.

  4. Add advertising. This presents some serious problems, subscribers; especially Millennial and Generation X viewers who are allergic to advertising might reject the service entirely if ads appear. Another problem is that the company like Pandora (NYSE: P) might not be able to sell enough advertising to make money.

My prediction is that Netflix will end up being sold suddenly; and unexpectedly, to a deep pocketed entertainment conglomerate; probably Disney, at some point in the next two or three years. As for Netflix stock, if you own it sell it now, it’s probably at a high, and if don’t own stay away from it.

Netflix should also serve as a cautionary tale to all investors. The moral of the story is read the financial numbers before buying the stock. Those numbers often show us what Mr. Market does not want to see. Remember Mr. Market is not just insane, he’s also very blind.

A slightly different version of this article previously appeared at Market Mad House.

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